Question

1. The opportunity cost of holding currency decreases when

A) income decreases.

B) the interest rate on bonds decreases.

C) the interest rate on money decreases.

D) wealth decreases.

1. Holding other things constant, an increase in expected inflation is likely to cause

A) a decline in the demand for real balances.

B) an increase in the demand for real balances.

C) no change in the demand for real balances.

D) no change in the demand for real balances only if the income elasticity of real money demand

1. An increase in the real interest rate would cause an increase in the real demand for money

A) no matter what the change in expected inflation.

B) if expected inflation fell by less than the rise in the real interest rate.

C) if expected inflation fell by the same amount as the rise in the real interest rate.

D) if expected inflation fell by more than the rise in the real interest rate.

Answer 1

1. Option B.

• When the price of the bonds increases, the interest rates on the bonds start to lower.
• At a lower bond rate, the opportunity cost of holding currency decreases as people now wish to hold more money.

2. Option A.

• When the expected inflation starts to rise, peoples demand for real balances decline.
• This happens when their income's start to fall as a result of the inflation.

3. Option D.

• When the expected inflation falls by a greater amount when compared to the rise in the real interest rate, the income of people start to rise.
• This will lead to an increase in the real demand for money.